Colorado medical-marijuana businesses have declined by 40 percent

A marijuana starter plant for sale at a medical marijuana dispensary. (Reuters)

Michael Lee is not a man who gives up easily.

When he opened his doors in 2005 as what he believes to be the first medical-marijuana dispensary in the state, he didn't know if police would come right through them and haul him off to jail.

He's been robbed. He's been audited by the Internal Revenue Service. To measure the potency of his product, he opened a marijuana-testing lab — which the Drug Enforcement Administration raided. And just months ago, he escaped felony charges alleging he was cultivating too many marijuana plants at his dispensary, Cannabis Therapeutics in Colorado Springs.

But neither cops nor prosecutors nor feds have matched up to his greatest challenge: enduring in a regulated, maturing medical-marijuana marketplace.

After eight years, Lee says he wants to sell his dispensary.

"I don't know how anyone can survive this pressure," Lee said. "I just can't keep doing this. I want to get out."

So do many others. Statistics show a sharp decline in the number of Colorado's medical-marijuana businesses.

In the summer of 2010, after legislators passed a law legitimizing dispensaries, there were 1,117 medical-marijuana businesses in Colorado, according to lists provided by the state's Medical Marijuana Enforcement Division and tallied by The Denver Post. (The number includes both dispensaries and makers of marijuana-infused products.) By the end of that year, as a "green rush" of cannabis entrepreneurs reached its apex, the total ticked up to 1,131.

Today, there are 675. In terms of sheer numbers, Colorado's medical-marijuana industry has shrunk by more than 40 percent.

"We predicted a consolidation," said Matt Cook, a former state official who oversaw the creation of Colorado's medical-marijuana business rules and now works as a consultant. "I think it's playing out exactly that way."

A vendor points out the variety of marijuana for sale at a medical marijuana market. (The Associated Press)

Part of the contraction — call it a green crush — is a result of the quirks of an industry that is regarded as an illicit drug market under federal law. Some stores near schools, for instance, closed after receiving warning letters from the state's U.S. attorney telling them they could face prosecution if they didn't move. Others drowned because of federal rules that make it impossible for marijuana businesses to get bank loans or take common tax deductions.

But other dispensaries succumbed to the more mundane challenges that all new businesses face.

In the past three years, profit margins for the industry have changed significantly. In 2010, an eighth of an ounce of marijuana often sold in dispensaries for $50, Lamoureux said last month at a Rand Corp. panel discussion on marijuana. Today, it goes for half that.

At the height of the boom, the state's dispensary owners diverged wildly in terms of financial backing, business smarts, marketing talent and management experience. In a business as heavily regulated as marijuana, being able to know and precisely follow all the rules is a skill in itself. As competition among dispensaries tightened, those traits mattered more — just as they would in a tire store or a cupcake bakery.

"We're seeing the maturity of an industry," said Robert Frichtel, who runs the Medical Marijuana Business Exchange, a consulting company. "At a fast pace, we're seeing something that was brand-new now coming into the early stages of a new business cycle."

Frichtel said the dispensaries that thrive today have a lot of money behind them, which they have used to scoop up failing businesses and create dispensary chains. They have business-savvy managers.

And, perhaps most important, they have large growing facilities that churn out marijuana that people want to buy. Because medical-marijuana dispensaries must grow most of what they sell, the surest way to expand a business' front room is to improve the back room.

"The bigger players have done well with having adequate grow space to support patient demand," Frichtel said. "One of the things that's very clear is the more successful your grow operation is, the better positioned you are to serve your patients."

While the total number of dispensaries is declining, the number of big dispensaries — classified by the state as Type 3 dispensaries that serve more than 500 patients — has remained steady. The number of Type 2 dispensaries, serving between 300 and 500 patients, has increased. Though many small dispensaries are closing, the market itself doesn't seem to be shrinking.

State sales-tax revenues, meanwhile, have grown. The Department of Revenue collected $5.4 million in sales tax from medical-marijuana businesses in the fiscal year ending last June. The amount is $1 million more than the state collected in sales tax in the 2011 fiscal year and extrapolates to $186 million in gross sales.

"I don't think it's a decline in the market at all," Cook said. "From what I'm hearing, they're selling 100 percent of what they're able to grow. The reality is it's not as simple as sticking a seed in the ground and watering it."

That hints at the stealth reason many dispensary owners are leaving the industry: fatigue.

Lamoureux, who owned multiple dispensaries with her husband, was one of the pioneers of the state's medical-marijuana industry. She served on two committees that helped draft rules for medical-marijuana patients and businesses.

But after years of hopscotching from bank to bank because of federal laws that make banks leery of working with dispensaries and days of worry after her dispensaries received warning letters from the U.S. attorney, she'd had enough. She spent four years in the industry, "which felt like 24," she jokes. She now works as a national medical-marijuana advocate.

"We opted out," she said. "We just didn't want to put in any more capital. It was exhausting."

Lee said state regulations pushed him to his breaking point. As soon as he got up to speed on one set of rules, they would change, he said. After he invested heavily in his marijuana-testing lab, for instance, the state passed a law saying labs couldn't be owned by dispensary owners.

But, despite the risks and the pressure, he's confident someone will line up behind him to take another swing. For one, medical-marijuana dispensary owners will have an inside track to open recreational-marijuana stores.

"Oh, I'm sure there's going to be interest," Lee said. "I think we should have no problem selling it."

John Ingold: 303-954-1068, jingold@denverpost.com or twitter.com/john_ingold

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